EU toughens fiscal pact, draft shows

European Union governments set tougher rules on budget deficits in the latest draft of a planned fiscal treaty, bowing to some objections raised by the European Central Bank. The pact will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product, according to the draft, which was obtained by Bloomberg News. It is dated Jan. 19.

European Union governments set tougher rules on budget deficits in the latest draft of a planned fiscal treaty, bowing to some objections raised by the European Central Bank. The pact will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product, according to the draft, which was obtained by Bloomberg News. It is dated Jan. 19. The blueprint, to be discussed Jan. 23 by EU finance ministers, also empowers the European Commission to set deadlines for budgetary convergence. It gives the European Court of Justice the power to fine countries whose balanced-budget laws don’t pass muster, while stopping short of the ECB’s request that the court more broadly enforce the budget rules. German Chancellor Angela Merkel has made the deficit- control treaty the centerpiece of efforts to combat the debt crisis, counting on stiffer rules to restore credibility to public finances in the 17-nation euro area.

The treaty will enshrine tougher sanctions, which are already in effect, at the constitutional level. It will make it easier to penalize high- deficit states and require each country to enact balanced-budget amendments. Asmussen requests ECB Executive Board Member Joerg Asmussen on Jan. 12 requested “substantial changes” to the treaty draft, saying the measure should include “ambitious and binding calendars” for meeting new budget goals, as well as an automatic correction mechanism.

These changes are reflected in the new draft. An ECB spokesman reached late yesterday declined to comment. Martin Kotthaus, chief spokesman for the German Finance Ministry, also declined to comment on the pact when contacted by telephone in Berlin.

Asmussen also sought to give the Court of Justice an “effective enforcement of all elements” of the balanced-budget rules. And he called for limiting “escape clauses” to natural catastrophes and “serious” emergencies beyond the control of national governments.

The new treaty is tougher on both elements without adopting the full range of the ECB recommendations. It says the court could impose a lump sum penalty of up to 0.1 percent of a country’s gross domestic product, to be paid into the euro area’s permanent rescue fund, on countries whose budget-balancing provisions are questioned. ‘Exceptional Circumstances’ The draft also says countries could avoid penalties if they face “exceptional circumstances” such as severe economic downturns or an “unusual event” that has a major impact on the affected government’s financial position, according to the draft -- a wider range of exceptions than the ECB sought.

The document says the treaty will enter into force after 12 members of the 17-country euro zone have ratified it. It also says necessary steps to implement the treaty changes shall be taken “within five years at most” after the treaty takes effect.

A spokesman for the European Commission couldn’t immediately be reached for comment late yesterday. The French Finance Ministry didn’t return calls seeking comment.